The markets pulled back from the top of the recent range but managed to finish well off the lows of the session. Down to 1,277 at one point, the S&P500 bounced nearly 1% before finishing the day at 1,288. Getting the blame for today’s pullback is a revenue miss by JPM and a downgrade to France’s credit rating by rating firm S&P. As we stated numerous times over the last week, an eventual dramatic move in one direction or the other was bound to happen sooner or later.
Yesterday morning in our commentary, An options strategy you’re not considering, we discussed an play that worked out to perfection today. We bought puts on SPY and the VIX, knowing that unless the market stayed completely flat for another few days, we’d be have to make money somewhere. Why? Because if SPY rallied VIX was going to decline so our VIX puts would return profits and vise versa.
The SPY puts we bought for $0.56 hit a high today of $0.94 for 67% gains. The VIX puts we bought at $0.60 hit a low of $0.45 for a loss 25%. Overall, the traded netted us 42% and we didn’t even have to hold for more than 24 hours. These are exactly the types of strategies you want to look to implement when the market approaches key points on the chart, as it did this week just below 1,300.
Talking further regarding the markets activity today, we were impressed by the significant rally off of the days lows, but we can’t say we were surprised. Why not? Because when the day started the VIX couldn’t even get above 22.50. Remember, without an elevation of the VIX, then we’re likely to continue to avoid large drops in the SPX. For those of you who haven’t, spend some time studying the inverse correlation in VIX/SPX over the last four years as you will understand our point better. So keep watching the VIX, unless it can sustain a move above 24 (24 is a 50% retracement from its 52 week high of 48) then SPX is unlikely to experience a drastic move lower.
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- SH @ the bell 1/12/12: An options strategy you’re not considering
- SH @ the close 12/14/2011: Markets negate would be bullish pattern; deciphering the VIX
- SH @ the close 9/27/2011: Markets continue to rally but finish well off highs
- SH @ the close 11/3/2011: Key support levels hold, markets reap the benefits
- Stockhaven @ the close 8/15/2011: Markets put first 3 day winning streak together in over a month